New Delhi: The Union Budget 2025-26, earlier this month, reaffirmed the Modi government’s commitment to strengthening India’s military capabilities, but financial constraints, including rising pension costs, import dependence, and shortfalls in capital funding, continue to challenge long-term strategic objectives.
A recent report by PRS Legislative Research has highlighted the need for a more aggressive push towards indigenisation, procurement reforms and capability enhancement to ensure India’s defence preparedness and strategic autonomy.
One of the most significant challenges in the Defence budget remains the increasing burden of pension payments, which now account for Rs 1.60 lakh crore—nearly a quarter of total defence spending. Over the past decade, pension expenditure has grown steadily, reducing the fiscal space available for modernisation and capital acquisitions. The government introduced the Agnipath scheme to mitigate long-term pension liabilities, which recruits personnel on a short-term basis without lifetime benefits. However, the scheme’s impact on defence finances and operational readiness remains to be fully realised.
Modernisation efforts have received a boost with a capital outlay of Rs 1.92 lakh crore, marking a 13 percent increase over the previous year. However, this remains below the ideal threshold to bridge capability gaps across the three services.
The Indian Air Force, which has been grappling with a shortage of combat aircraft, has received the largest modernisation allocation, yet its squadron strength remains below the required levels.
The Navy has been allocated Rs 52,290 crore, with a focus on shipbuilding and procurement of critical platforms. Meanwhile, the Army’s allocation, although substantial, is primarily directed towards salaries and operational expenses, limiting its ability to undertake major modernisation initiatives, the research report mentioned.
India’s heavy reliance on defence imports continues to be a strategic concern. Despite recent progress in promoting domestic manufacturing, the country remains the world’s largest arms importer, with a significant portion of its military hardware sourced from Russia, the United States, and France.
The Defence Acquisition Procedure (DAP) 2020 aims to reduce this dependence by mandating higher indigenous content in defence procurement. Additionally, five positive indigenisation lists have been introduced to gradually phase out imports of over 5,000 defence items. However, the report also suggests that the slow pace of procurement and bureaucratic hurdles in defence acquisitions continue to delay critical projects.
Defence production and exports have witnessed steady growth, with domestic production reaching Rs 1.27 lakh crore in 2023-24 and defence exports touching Rs 21,083 crore. The government has set ambitious targets of Rs 35,000 crore in defence exports by 2025 and Rs 50,000 crore by 2028-29. The private sector has played a crucial role in this expansion, contributing over 60 per cent of total exports. However, quality control issues, supply chain dependencies, and delays in indigenous projects, such as the Tejas fighter aircraft and Project-75 submarines, highlight the need for stronger oversight and faster execution.
R&D expenditure in defence remains another area of concern, with its share in the total budget declining to 3.9 per cent from 4.7 per cent a decade ago. The Defence Research and Development Organisation (DRDO) also faced persistent delays in key projects, affecting the timely availability of critical technology. While the government has encouraged private sector participation in defence R&D through various initiatives, a more robust push is needed to ensure technological self-reliance.
India’s defence spending, as a percentage of GDP, remains at 1.9 percent, significantly lower than the 3 percent recommended by the Standing Committee on Defence. With growing security challenges, including an assertive China and persistent tensions with Pakistan, sustained investments in capability enhancement are essential. The establishment of a non-lapsable modernisation fund, as recommended by defence experts, could help address long-term funding gaps, but its implementation has been delayed due to constitutional constraints.